Potential lift in 2025 for the property sector

In March, the South African Reserve Bank (SARB) decided to hold the repo rate unchanged at a 15 year high of 8.25%, where it has been since May 2023. The central bank is unlikely to ease its policy in May, even though it would likely put some much-needed stimulus into the lending market. South Africa generally follows international trends and the US Federal Reserve is unlikely to cut interest rates until the end of 2024, if at all. One can understand the Reserve Bank’s desire to get inflation under control, as everyone is struggling with high food and energy costs.  But those with home loans have been particularly hard hit by the central bank’s actions keeping the prime lending rate at 11.75%.

Eighty20, South Africa’s leading consumer analytics and research business, recently reported on the state of home loans in South Africa.

❝ According to the most recent census, South Africa’s population of 62 million people live in roughly 17.8 million households.

According to the most recent census, South Africa’s population of 62 million people live in roughly 17.8 million households.  This number of households has grown significantly since the 2011 census which counted 14 million households.

In terms of type of dwelling, there are 560 000 traditional dwellings, 1.43 million informal dwellings, and 15.8 million formal dwellings.  Of the latter, fewer than 2 million of those homes have a mortgage.  For the roughly 2.4 million individuals who hold those mortgage products (many have a joint mortgage) 86% are older than 35 and 90% earn more than R10,000 per month personal income.  Despite what is a surprisingly low number of home loans relative to other loan products, they make up more than half of the total outstanding credit balance of nearly R2.4 trillion.

Home Loans post-COVID

In early 2020, in order to stimulate an economy decimated by Covid and a recession, the prime rate dropped to the lowest it has ever been (7%).

This low interest rate environment created a surge in the number of home loans, with 195 000 home loans issued in 2021, up 30% from the previous decade’s average which hovered around 160 000 a year.  But as inflation started to bite in 2022, ten consecutive interest rate increases over a year and a half brought the prime rate to its current 11.75%.  The high interest rate environment contributed to a drop in the number of new home loans of 5% in 2022, and by 2023 Q3 was down 27% year on year.  Against this environment, total home loans as well as total home loan balances dropped from Q3 to Q4 2023.

Home Loans Pre-COVID

Interestingly, back in 2008, upward of 100 000 more new home loans were being issued per year compared to any year since.  The Global Economic Crisis that year created an environment that South African home loans still haven’t fully recovered from.  What has happened is the number of home loans has shrunk, and been concentrated in fewer hands while the value of those home loans has gone up.  “In terms of Eighty20’s ENS segments, 95% of all home loans are currently held by three segments – The Middle Class, The Heavy Hitters, and the Comfortable Retirees,” says Eighty20.

❝ From 2007 to 2021, house prices rose by about 69% (but when adjusted for inflation, real prices actually fell 19%).

From 2007 to 2021, house prices rose by about 69% (but when adjusted for inflation, real prices actually fell 19%).  While the value of home loans issued annually increased by a similar percentage over that period, the number of home loans issued dropped by 31%.  High unemployment and weak household finances have exacerbated the problem, making it harder for new entrants to get into the property market, and remaining in rental arrangements.

“Property24 has seen a switch from the for-sale market to the rental market, largely driven by the interest rates and consumer affordability – people are showing a strong demand for good quality rental properties, with 2.2x more enquiries on rental stock than for-sale stock,” says Nalen Naidoo, General Manager at Property24.

Regional Snapshot – Western Cape is number one in transfer value

“At a provincial level, transfer values have started switching – for many years, Gauteng has been the leader in both transfer counts and transfer values.  Whilst Gauteng is still the leader in transfer counts, 2023 was the first year that the Western Cape has overtaken Gauteng in terms of erf and sectional scheme transfer values and this has continued into 2024,” adds Naidoo.

From its beautiful beaches, picturesque mountains and wine farms, Western Cape also has a more than 10 percentage points lower unemployment rate and is creating jobs at 3 times the rate of the rest of South Africa. The Western Cape also has the lowest number of home loans going into default.

❝ 2020 Q4 to 2022 Q4 saw a large increase in Heavy Hitter home loans per quarter during the lowest interest rate environment South Africa has seen in decades.

In terms of Eighty20’s segmentation, 2020 Q4 to 2022 Q4 saw a large increase in Heavy Hitter home loans per quarter during the lowest interest rate environment South Africa has seen in decades.  New home loans in the Western Cape peaked for heavy hitters at nearly 5,500 new loans in quarter three of 2021 – 73% higher than 2019 Q3.

“There might be some good news for the rest of the country, however, as economists predict we will only see some improvement in the next year as interest rates come down,” concludes Eighty20.

In this environment, both the government and private sector will be more likely to bring new housing stock onto the market to deal with the current housing shortage.  With nearly a month of no load-shedding this quarter, 2024 is looking a bit brighter.

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